GLOSSARY TERM
Sequence of Returns Risk
Sequence of returns risk means that the order in which good and bad returns happen can affect your final outcome.
What does this mean in practice?
This matters most when money is being withdrawn. Early losses can do more damage than later losses, because the portfolio has less time and less capital to recover. Even if the average return is the same in the end, the path along the way can still make a big difference.
Example
Two retirees have portfolios with the same long-term average return. One portfolio suffers big losses in the first years of retirement, while the other suffers them much later. The person with the early losses may run into more problems, because withdrawals happen while the portfolio is already down.
Why it matters
It helps explain why timing matters more when you are withdrawing money than when you are still building wealth. It is especially useful to understand when planning retirement or future income needs.
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